2011 Commodity Outlook

Below is an excerpt from The Hightower Report’s most recent Special Report. To receive access the full story, with trade strategies, along with our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

While many economists and talking heads have allowed stubbornly high unemployment rates in developed countries to darken their assessment of the world economy, a lot of progress has been made in putting the sub-prime crisis in the rear-view mirror, and a certain amount of forward momentum is being seen. Certainly, periodic flare-ups of European sovereign debt problems have complicated the global recovery process, but it appears that the ECB and the US can be counted on to make the right decisions, especially after both entities have used up quite a number of the possible wrong solutions. One can’t fault Euro-zone and UK leaders for their decisions to move quickly with aggressive government austerity programs, as the marketplace (primarily Germany) was demanding that type of response. However, overly aggressive government spending cuts isn’t the short path to growth, and for many EU members the market wasn’t inclined to allow them free rein. In a surprise twist of fate, the US was never really held to the same debt and stimulus limits as many other countries, and as a result the Dollar showed some recovery potential toward the end of 2010.

Even though we think that the US economy will continue to see its dominance slip, we expect it to remain an integral part of the global economy. And because the US has so far avoided “tangible” deficit reduction efforts and it in turn has continued to be aggressive with its easing efforts, we have a fairly upbeat and positive economic view toward 2011. Even more encouraging is the potential for the US to shift from the socialist/anti-capitalistic leanings that were embraced by the Democratic President and the Democratically-controlled Congress. In fact, even with the lame-duck Democrat House, the US saw efforts to extend the Bush era tax cuts for all incomes.

The US economy seemed to remain on a positive footing into the New Year, but perhaps the pace hasn’t been living up to market expectations. With disappointing December Non-Farm Payrolls and US Initial Claims numbers released in January, a bit of macroeconomic concern has resurfaced. For the time being, the dominance of the US over the Euro zone has been tamped down, as auctions of Euro zone debt went off without a hitch and strong numbers from Germany seemed to close the gap with the US.

In addition to news that S&P and Moody’s might be poised to reduce the US credit rating, the markets have also been a bit concerned that several US states might be poised for trouble directly ahead. Illinois ignored the calls to reign in spending by passing a last minute, lame-duck tax increase, and the international markets took that as a sign that the US hasn’t recognized the seriousness of their debt crisis yet. Therefore, the Dollar seems to be poised to lose some of its strength versus most other currencies. This helped drive the dollar index to the lowest level since November 22nd, and while this might help boost demand for commodity markets, traders remain fearful that the “shift” from the aggressive government spending era and monetary stimulus period of 2008 to 2010 might end with a dramatic shift toward sharp cuts in government spending and sharply reduced spending from state and municipal governments. This may be a drag on economic conditions.

The markets also seem to have found Chinese economic activity to be much more stable than initially perceived, even though China has taken a very aggressive stance in battling domestic inflation. China is expected to see 18 million cars sold domestically in 2010, while the US is only expected to see 12.4 million, which suggests to us that China is quickly becoming the dog that wags the tail in the physical commodity markets. Those seeking accurate signals on the direction of the world economy (as well as commodity pricing) need to shift their thinking from fearing that China will trip up its economic growth by battling inflation to realizing that their growth is well entrenched and that they have no interest in derailing their prosperity.

While global economic growth for 2011 may not be stellar, it could be comparable or slightly better than 2010. Even modest growth is expected to leave most physical commodity prices in a position to see distinct and perhaps aggressive upward moves. Many could post new “all time” highs!